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About Investments
The turmoil just doesn't seem to abate in the investment markets, so, I have decided to offer you a short note about the importance of being invested at all times, if the best results are to be accomplished. Some people, under the effect of the general malaise, decided to withdraw completely or at least suspended contributions to their investments. They think that when the market turns around they will join again. These investors had taken home their losses and are likely to keep them forever. Whatever gains they may make later, the loss will never be recovered. My reason to write to you is to show, in your best interest, how mistaken the above stance is and to show you also the effect of either position: staying in or getting out. The jumping in and out, “the timing of the market” is actually a self-defeating process. Those whom are attempting to do it are almost invariably losing money. The substantial gains occurring in the market are sprinkled around in time randomly without any regularity or reason. If there were any reason at the time it could not be predicted, only explained after it had happened. Interestingly, the greatest historic advances of the Wall Street Stock Exchange all happened in the last 10 years. They are listed in this chart by the Wall Street Journal:
Source: http://online.wsj.com/mdc/public/page/2_3024-djia_alltime.html The same thing is also depicted in this graph: Take it from John Bogle, legendary founder of Vanguard, the most respected mutual fund company in the world. Here's what he has to say about market timing... Now, it is easy to understand that if one is standing on the sidelines when one or more of these random increases occur, then he or she will miss those gains. In fact, missing those particular days in the market will have a very damaging effect on the future value of a portfolio. And just how damaging it can be is shown on the following graph:
The graph explains what happened to the person who invested $10,000 on January 1, 1980 and stayed invested every day ever since: his holdings where worth $286,000 by the end of 2006. Had he missed the five best days during this 26 years his holdings would be worth $212,000. Had he missed the best ten days, his holdings would be less than half of the first example, $131,000, and missing the best 30 days would amount to a value of only a quarter of what the first example would be: $78,000. The last unfortunate guy I wouldn't even like to mention. The effects of these increases are further compounded if the investor keeps up the regular contributions to the investment. The units purchased with the regular contributions are cheaper when the market is down, but of course they are also participating in the increases and further boost the value of the portfolio. This is what’s called the dollar cost averaging and this compounding effect is the reason why the dollar cost averaging is so recommended. In general terms we may say that a bear market, that is to say a market adjustment, may take anywhere between 12-24 months. But on the average 18 months is the norm. In our case, by now we have already passed the 12 months, so, the expectation of turnaround is becoming more and more reasonable.
Source: MSCI World Gross Accumulation Index The red line on this graph shows the usual short-term ups and downs of the market between the highs of 13.9% and the lows of 14.7%. No matter how nerve-wrecking it may seems, the blue line, in contrast, shows how the market increased over the long term nevertheless.
As it is clear from the graph above, the greatest drops and recoveries of the last thirty years look only as small blips in the general upward trend of the last thirty years and among them our present downturn and recovery will also look the same in a few years.
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